Downturn Wealth Planning Threats and Opportunities
The market is in a correction and flirting with bear market territory. Given this environment, assessing potential risks and taking advantage of planning opportunities is important.
Start by reviewing loan-to-asset ratios where portfolios are pledged against lines of credit. A $1 million pledged asset line against a $2 million portfolio reflects a 50% loan-to-asset ratio. If the portfolio declines 20% or to $1.6 million, the ratio jumps to 63%, nearing the 65% maintenance limit. A way to buffer collateral accounts is to reposition a conservative bond allocation or add cash equivalents to help maintain flexibility – check in with your Wealth Manager on this.
To help keep leverage low and avoid selling out in a further downturn, keep at least one year of liquidity assets in liquid cash-like assets. This includes planning for living costs, tuition, tax payments, and other large upcoming outlays.
Capital calls from alternative asset managers may increase during a downturn. For those approaching leverage limits on portfolio-based lending, alternative financing options such as a home equity line of credit (HELOC) may offer useful flexibility.
Despite the challenges of a downturn, there are also planning opportunities. Tax-loss harvesting can help offset gains and reduce tax liabilities. To remain invested while avoiding the wash-sale rule, consider purchasing a proxy asset; your Wealth Manager may have suggestions.
A market decline can also present a compelling window for Roth conversions. Assets within qualified accounts may be temporarily depressed, making it an opportune time to convert to Roth. Future growth, assuming a market recovery, will occur tax-free.
Similarly, lower asset valuations can enhance the impact of wealth transfer strategies. Moving assets out of the estate during a downturn means any subsequent appreciation occurs outside the taxable estate, potentially reducing future estate tax exposure and minimizing the gift tax exemption usage.
Please reach out to your Wealth Manager with questions.
Weekly Commentary
Wealth Planning Commentary – April 7, 2025
Mallon FitzPatrick
Downturn Wealth Planning Threats and Opportunities
The market is in a correction and flirting with bear market territory. Given this environment, assessing potential risks and taking advantage of planning opportunities is important.
Start by reviewing loan-to-asset ratios where portfolios are pledged against lines of credit. A $1 million pledged asset line against a $2 million portfolio reflects a 50% loan-to-asset ratio. If the portfolio declines 20% or to $1.6 million, the ratio jumps to 63%, nearing the 65% maintenance limit. A way to buffer collateral accounts is to reposition a conservative bond allocation or add cash equivalents to help maintain flexibility – check in with your Wealth Manager on this.
To help keep leverage low and avoid selling out in a further downturn, keep at least one year of liquidity assets in liquid cash-like assets. This includes planning for living costs, tuition, tax payments, and other large upcoming outlays.
Capital calls from alternative asset managers may increase during a downturn. For those approaching leverage limits on portfolio-based lending, alternative financing options such as a home equity line of credit (HELOC) may offer useful flexibility.
Despite the challenges of a downturn, there are also planning opportunities. Tax-loss harvesting can help offset gains and reduce tax liabilities. To remain invested while avoiding the wash-sale rule, consider purchasing a proxy asset; your Wealth Manager may have suggestions.
A market decline can also present a compelling window for Roth conversions. Assets within qualified accounts may be temporarily depressed, making it an opportune time to convert to Roth. Future growth, assuming a market recovery, will occur tax-free.
Similarly, lower asset valuations can enhance the impact of wealth transfer strategies. Moving assets out of the estate during a downturn means any subsequent appreciation occurs outside the taxable estate, potentially reducing future estate tax exposure and minimizing the gift tax exemption usage.
Please reach out to your Wealth Manager with questions.
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